Navigant Research Blog

Tug of War Over Utility Customers Intensifies

— November 5, 2014

In the last few years residential demand response (DR) has become a thriving market.  Recently, Constellation and Honeywell rolled out a service for all customers in areas that the companies serve designed to encourage consumers to purchase Honeywell thermostats and network them into Constellation’s platform.  Initially introduced only to Startex customers (a Texas subsidiary of Constellation) earlier this year, this service highlights the rising competition for energy customers.

Constellation claims that the program has the potential to shave upwards of $128 annually from customers’ electric bills.  Such services could help utilities reach energy efficiency targets as well as assemble an effective pool for residential DR programs.

There’s only one problem here, and it’s exacerbating tensions between utilities, energy service companies, and regulators.  The problem is that this type of program, also referred to as a hybrid DR model, blurs the lines around who exactly “owns” the customer, as well as who is providing the resource.

The New Disruptors

It seems natural for utilities to be receptive to the continued expansion in resources used to target electric customers for energy efficiency and DR programs.  But many utilities, particularly those in regulated markets, see this as encroaching on an established model in which the utility acts as the face of the service in all cases (regardless of who’s actually providing the service).  As utilities shift from vertical producers and deliverers of kilowatt-hours to being providers of electric services (the Utility 2.0 model), the general consensus is that they want to maintain their statutory ownership of their customer base.  Having already given up so much, it’s likely that utilities will put up a fight in holding onto at least this little bit of status quo and margin.

But that’s not how the many disruptive participants, which have evolved within the energy and utility industry or entered from the broadband and IT spheres, want to play.  They want the customer too, either to expand their business and gain more margin, or because they already own the customer through their primary business (think broadband providers).

Not Letting Go

Looking at it from an economic perspective, some argue that allowing non-regulated service vendors to compete will eventually favor the customer.  Others point out that, while an electric services model does have the characteristics of a highly competitive market, the fact remains that delivering electricity requires substantial and expensive infrastructure, therefore limiting the number of competitors, which could disfavor the end user.  Regulators have been understandably reluctant to institute any sort of rapid overhaul.

I’d argue that regulators and utilities are highly aware that they must change the way they do business in order to facilitate the transition of the energy industry to a lower-carbon state.  But it’s not surprising that they still want to defend their end-user relationships.  Customers like having a single point of contact for their energy services – not separate contacts and bills for delivery and energy efficiency.  Furthermore, as utilities lose revenue associated with dismantled vertical business models, energy efficiency and DR are among the few areas where they have the ability to supplement losses.  As hybrid DR models spread, it’s unlikely that incumbents will let their customer relationships go easily.

 

Severe Drought Hastens Hydropower’s Slow Decline

— November 4, 2014

Coal retirements, the shale gas bonanza, post-Fukushima nuclear curtailments, the rising adoption of distributed generation, and emerging price parity for solar PV and wind – the dynamic changes impacting electricity grids worldwide are many.  Now, with prolonged droughts affecting leading global economies, like Brazil and California (the world’s seventh and eighth largest economies by gross domestic product [GDP], respectively), a slow decline in the prominence of hydropower is in the mix.

Historically, hydropower has been the primary source of clean and renewable energy in both economies.  Its decline has had a more severe impact on Brazil’s grid, but in both places, this development is expected to continue to coincide with a further rise in gas-fired generation and renewables.  Due to the current cost of renewables, the consequences of this shift may be a rise in greenhouse gas emissions in each country’s electric power sector.

California Copes

With a fleet of 300 dams, California is among the nation’s leaders in hydropower generation.  However, hydro in the state has declined from peaks in the 1950s, when it was responsible for more than half of the state’s generation mix, to just 9% in 2013.  Having prepared for hydro’s decline by broadening its generation mix over the last several decades, the California grid remains mostly insulated from the worst effects of nearly a half decade of severe drought.

California generates around 55% to 60% of its power from natural gas and has seen a 30% increase in gas-fired generation since 2002.  Meanwhile, California’s leading investor-owned utilities across the state – Pacific Gas & Electric (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E) – are on track to meet or exceed their 33% renewable procurement obligations by 2020 under the state’s Renewable Portfolio Standard (RPS) policy.

Brazil Gasps

Facing its worst drought in 40 years, meanwhile, Brazil has been more severely affected by reduced hydropower generation than California.  Currently, the second leading producer of hydroelectric power in the world, trailing only China, Brazil relies on hydro for more than three-fourths of its generation.  According to data published by BP earlier this year, hydropower consumption fell 7% in 2013.

This rapid decline has prompted severe rationing in 19 cities, undermined hydropower generation, and resulted in blackouts across the country.  In the run up to the 2014 World Cup, the Brazilian government provided more than $5 billion to subsidize electric utilities, replacing lost hydroelectric generation with fossil fuel-fired generation, including large amounts of liquefied natural gas.  While this helped stabilize the grid during the event, it has nearly doubled greenhouse gas emissions from the power sector.

Brazil’s experience provides a harsh lesson for drought-stricken areas with a high dependence on hydropower.  While natural gas is a low-carbon alternative relative to coal-based generation, it may stall or reverse carbon mitigation efforts when used in place of hydropower.  Renewables can help make up the difference, but even with sharp declines in the price of solar PV and wind, they remain far more expensive than hydropower or natural gas.  While both California and Brazil are in a hole with respect to water supply and hydroelectric generation, persistent drought is unlikely to result in a significant increase in new renewables spending without the introduction of new subsidies.

 

What “Sustainable Buildings” Really Means

— November 4, 2014

Employing sustainable technologies and models for new and existing buildings is the central challenge of the construction and energy management industries today.  Often, simply defining “sustainability” can be in and of itself a challenge.  The goal is to transform buildings from static pillars of energy use to dynamic environments promoting long-term, low impact solutions to the challenges of high-carbon energy, droughts, and risks associated with climate change.

At the Vision 2020 Sustainability Summit, held as a precursor to the Greenbuild conference in New Orleans, the role of technology in driving this shift was a primary topic.  At the Summit, at least, the definition was clear.  Sustainability was presented as a series of long- and short-term initiatives that will help accelerate the transformation.

In a series of discussions of applied sustainability, the Summit speakers presented a number of innovations and solutions already in design or in the field today.  Starting with the basics, Doug Bennett, conservation manager with the Southern Nevada Water Authority, described water conservation in practice in the desert state.  As people continue to relocate to the drought-afflicted Western states, Bennett pointed out, most residential water is now used for landscaping, not inside the house.  A new frame of mind is needed, he suggested, to ensure that resources will be available in the next decade.  For example, just because fountains and lawns use reclaimed water, that doesn’t mean that the water is “free.”  Reclaimed water is still water and can be viewed as part of the potable water cycle, with admittedly different attributes.

Not Just Sinks

Most of the event was focused on buildings and their potential to be more than the blunt end-use energy sinks they are today.  Steven Winter, founder and president of Steven Winter Associates, talked about how the building stock of the near future is in development now.  It takes time for a construction project to be put in place, and if aspirational goals are to be incorporated, there are plenty of contemporary projects in progress that can address efficient and sustainable design, construction, and implementation.

New financial mechanisms, such Enlighted’s Global Energy Optimization (GEO) financing for capital matchmaking for LED retrofits, are starting to tap the great potential for efficiency savings in existing buildings.  (See Navigant Research’s report, Energy Efficiency Retrofits for Commercial and Public Buildings, for a detailed examination of the drivers and challenges of retrofits in existing buildings.)  Winter also advocates the use of more carrots and sticks for sustainable building operations.  The use of publicly available city-based benchmarking is one such approach; open disclosure by entities like GRESB and Green Building Information Gateway is another.

Every Bit Matters

Paul Torcellini of National Renewable Energy Laboratory (NREL), an early leader in zero energy buildings, emphasizes that every decision in a building’s design, construction, and operation has some energy impact.  That simple realization is frequently overlooked.  One major challenge facing existing and new buildings, including high-performing buildings, is the need to train personnel to ensure that complex system operations (with lofty goals) of a building can be easily carried out.

The other speakers at Vision 2020 made it clear that in order for the ambitious goals of a sustainable, low-carbon, low-energy future to be reached, innovation in materials, processes, and technology must be put into place now.  And the building stock of the future will mostly be the building stock of the present – so investment and attention are needed to get that stock performing optimally.

 

Residential Solar Market Roiled by Proposed Rate-Basing Scheme

— November 3, 2014

There is a growing debate about the financing and subsidies of residential solar PV systems.  How this turns out could have a significant impact on the market’s future.  At the center of the discussion are Arizona Public Service (APS) and Tucson Electric Power (TEP), two regulated utilities that have proposed new rate-based solar programs for residential customers.  Such a move threatens private solar installation-financing companies such as SolarCity and Sunrun, which currently lead the growing market by offering no-money-down leasing schemes that have attracted thousands of new customers.

The private solar companies argue that allowing the utilities to sell rate-based solar systems would create an uneven playing field.  They believe the regulated utilities should set up their own separate, unregulated companies and compete for rooftop solar business with the independent installer-financing companies.  That’s precisely what electricity providers operating in other states have done.  For instance, NRG and Edison International have entered the rooftop solar market by establishing unregulated business units that operate in the Northeast and California, thus avoiding the controversy.

Keeping the Playing Field Level

This is a thorny question for Arizona, and both sides have convincing arguments, as my colleague Taylor Embury pointed in a recent blog post.   The solar installers argue that permitting the Arizona utilities to go ahead with their rate-basing plans would set up unfair competition because of their monopoly status.  The utilities say they just want to expand into solar because of customer demand for distributed generation (DG), and because it helps the utilities meet mandated goals for DG.  But the solar installers and their financiers have advantages they can leverage as well, in the form of the 30% income tax credit and a depreciation method called Modified Accelerated Cost Recovery System (MACRS) that can make the investments quite attractive.  A decision on whether to allow the utilities to move forward with their solar programs is pending before Arizona’s utility regulator, and a ruling is expected before the end of the year.

This topic is certain to be part of the upcoming discussion during Navigant Research’s “The Home as Micro Power Plant” webinar, which takes place on November 11.  Besides the rooftop solar issue, panel members will examine the potential for residential energy storage, how plug-in electric vehicles could be used as grid assets, and whether residential combined heat and power can gain market traction.  To register for the webinar, click here.

 

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